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Petroleum economic modelling in general

Dr. Alfred Kjemperud The Bridge Group AS

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Why economic modeling


Economic models are mainly used for the following four reasons:
Investment decisions Budgeting Annual reports Risk analysis to understand the risk elements within the business and within individual projects (sensitivities).
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Investment Decisions
Petroleum investments are
capital intensive irreversible high risk/uncertainty

Investment decisions today are only unfolded in the uncertain future for both company and government
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Modeling = Predicting
Petroleum project modelling is based on
knowledge of fundamental elements in technology and economics empiric data and a bit of artistry

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Warning
All modeling is imperfect.
It is always a simplification of reality Depends on quality of input

The challenge is to assess the weaknesses and discover flaws

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Resource Rent
Allocation of revenues from Production
Bonuses Royalties Prod. Sharing Taxes Gov. Participation

After Johnston (1995) PPM Expert Visit - Indonesia,

Activities and cash flow


Income

Contract award

PDO

Government

Time

Costs
Pre-license Exploration Development Production Production Rehab. Abandonment

Lead Time
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Input to cash flow models


Production curve Oil/gas price Capex Opex Fiscal regime Discount rate
Gross revenue

Net revenue

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Production curve

Plateau Volume Build-up Decline

Time
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Cutoff

Factors determining production


No of wells Plateau factor (%) Production rate per well Plateau production rate Remaining oil/gas at start decline Decline rate (%) Cut off rate

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Oil Production
Oil Production
300.0 250.0
Oil [Thousand bbl/d] Assoc. Gas [Thousand o.e./d]

200.0 Thousand bbl/year

150.0

100.0

50.0

0.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Year

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Gas Production
Gas Production
3000.0
Non Assoc. Gas [Million scf/d] Condensate [Thousand bbl/d

2500.0

Gas (Million scf/day) Condensate (Thousand bbl/d)

2000.0

1500.0

1000.0

500.0

0.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Year

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Statfjord Oil - Norway


Oil Production - Statfjord, Norway 560 million Sm3 (3520 Million bbl)
90 % 80 % 70 % 66 % 60 % 50 % 40 % 30 % 20 % 10 % 0% 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Years 23 % Oil Production P/R percentage

100 %

40

35

30

25

20

15

10

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Ula oil - Norway


Oil Production - Ula, Norway 80 million Sm3 (503 Million bbl)
8 Oil Production P/R percentage 7

90.0 %

80.0 %

70.0 %

60.0 % 53.7 % 5 Million Sm3

50.0 %

40.0 % 35.1 %

30.0 % 2

20.0 %

10.0 %

0.0 % 1986 1987 1988 1989 1990 1991 1992 1993 1994 Years 1995 1996 1997 1998 1999 2000 2001 2002

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Oseberg Oil - Norway


Oil Production - Oseberg Field, Norway 350 million Sm3 (2200 million bbl)
35 Oil Production P/R percentage 30

00.0 %

90.0 %

80.0 % 25 70.5 % 20

70.0 %

60.0 %

50.0 % 15 39.2 % 10

40.0 %

30.0 %

20.0 % 5

10.0 %

0.0 % 1986 1987 1988 1989 1990 1991 1992 1993 Years 1994 1995 1996 1997 1998 1999 2000 2001

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Million Sm3

Frigg Gas - Norway


Gas Production - Frigg Field, Norway 116 billion Sm3 (4.1 TCF)
12 Gasl Production P/R percentage 1 10

1.2

0.8

63.9 % 6

0.6

0.4 29.8 %

0.2

0 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

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Rules of thumb - 1
TECHNICAL ASPECTS Peak production/total reserves Decline rate Rule of Thumb 10-12% 10-12%

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Lead Time
Years from discovery to production

Sleipner Vest 22 20 Lille Frigg Statfjord Nord Statfjord st 18 Hod Troll II 16 st Frigg Gugne 14 Snorre Brage Heimdal Troll I Sleipner st 12 Tommeliten Loke Heidrun Gamma Gyda Ula 10 Cod Yme Eldfisk Oseberg Draugen Veslefrikk Fry Gullfaks Albuskjell 8 VestEkofisk Tor Oseberg Vest Tordis Murchison Edda Frigg 6 Embla Valhall Statfjord Gyda Sr 4 Gullfaks Vest Ekofisk 2 0 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990

Year of discovery

Petr. res 9612067

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Exercise - Production
Construct a production curve for an oil field with 300 million barrels recoverable reserves which will be produced over 20 years. Lead time is 5 years and cut off rate is 10,000 bopd (Use Excel)

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Input to cash flow models


Production curve Oil/gas price Capex Opex Fiscal regime Discount rate
Gross revenue

Net revenue

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Oil prices through time

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Input to cash flow models


Production curve Oil/gas price Capex Opex Fiscal regime Discount rate
Gross revenue

Net revenue

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Expenditures = Cost
Capital expenditure
Wells Constructions - Facilities Pipelines

Operating expenditures
The cost of running the operations
Fixed Opex Variable Opex
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Capex and Opex


Capex and Opex
450 400 350 300 Million USD 250 200 150 100.0 100 50 0
20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32

350.0 TOTAL CAPEX [Million USD, inflated] Varible Opex TOTAL OPEX [Million USD, inflated]

300.0

250.0

200.0

150.0

50.0

0.0

Years

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Well cost - Asia


Averages
Field size Exploration
Expl. Well cost 6.9 7.43 7.43 7.43 7.43 7.43 7.34

Appraisal

Development/operation

bbl 10 25 50 125 250 500 160.00

Sm3 1.6 4.0 7.9 19.9 39.7 79.5 25.44

Test 1.14 1.31 1.31 1.31 1.31 1.31 1.29

Averages Appraisal Averages, Capex First Field life no. of Duration , Capex Opex Opex wells Well cost (years) (USD/bbl) (USD/Sm3) oilYears (years) (USD/bbl) (USD/Sm3) 1 6.7 1.8 5.16 32.46 3.8 6.4 6.72 42.3 1.43 7.29 1.83 4.34 27.27 4.17 6.86 5.30 33.34 2.14 7.29 2.17 3.68 23.13 5.17 9.00 4.93 30.99 2.29 7.29 2.83 2.93 18.43 6.33 13.00 4.41 27.76 3.14 7.29 3.67 2.51 15.79 7.67 16.86 3.89 24.47 3.86 7.29 4.17 2.09 13.17 8.33 19.57 3.47 21.84 2.31 7.19 2.74 3.45 21.71 5.91 11.95 4.79 30.12

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Opex (usd/bbl)
(Norwegian fields 1998)
30.0 25.0

20.0

USD/BBL

15.0

Series1

10.0

Average 4.4
5.0

0.0 0 10 20 30 40 Fields 50 60 70 80

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Facility Cost Estimates


Unit cost ($MM) E xploration Well 3-4 Appraisal Well 2-4 Development 1-1. 5 CP P 300-500 WP (4 legs) + Sealines 13 - 18 LQ 40-60 (100 - 200 POB) FSO 1 MMbbl 100 B ooster Compressor 0. 4-0. 5

Pipeline 16 " Pipeline 24 "

0.4 MM$ / km 0.6 MM$ / km


Ref. Anon Punnahitanon, PPM

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Yearly opex as % of total capex


(Norwegian fields 1998)
Yearly opex as % of total capex
7.00 %

6.00 %

5.00 %

4.00 % % 3.00 % 2.00 % 1.00 % 0.00 % 0 10 20 30 Fields 40 50 60

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Model checks
Several checks of the results should be performed
Royalty % per year Profit share % per year Production plot Capex and Opex plot Depreciation plot

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Rules of thumb -2
BASIC ASSUMPTIONS Rule of Thumb Capex/bbl 3-5 usd Capex as % of Gross Revenue 10-20% Opex/bbl 3-5 usd Opex/peak year as % of total Capex 4-8%

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Input to cash flow models


Production curve Oil/gas price Capex Opex Fiscal regime Discount rate
Gross revenue

Net revenue

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Share, take and profit margin


Gross project revenue 100 -Royalty 0 Net project revenue 100 Total cost -40 Profit basis (Operating income) 60 Taxes 35 Net after tax income 25
Contractor take Contractor profit margin Contractor share Government take 42% 25% 65% 58% (25/60) (25/100) (25+40/100) (35/60)

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The Government Choice


Petroleum Fiscal Arrangements
Concessionary Systems
Norway United Kingdom Pakistan Tunisia New Zealand Pure

Contractual Systems Service Contracts Production Sharing Contracts


Angola Indonesia India Nigeria Gabon

Service Contracts Risk Service Contracts


Argentina Brazil Venezuela The Philippines

Limited usage

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Elements in a PSC
Work Commitment Bonus Payment Royalties Cost Recovery (Cost Oil) Profit Oil Government participation Domestic Market Obligation Ring fencing
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Indonesia- PSC (4th Gen.)


Mother of all PSCs
(85/15 Split) Royalty: FTP split Cost Oil : Profit Oil: Tax Rate: 0% 20% 100% 28.8462% 48%
5.8

Contractor
Gross Revenues
100

Government

First Tranche Petroleum 20 %


14.2 %

14.2

Net Revenues
80

28.0

Cost Oil
35 %

Profit oil
52

15.0

Profit oil to Contr.


28.8462 %

37.0

Effects The split does not change with the level of cost Effective Gov. take is 85%

Taxable
20.8

-10.0

Tax
48 %

10.0

38.8 10.8 15 %

After tax entitlement Net Cash Flow Take

61.2 61.2 85 %

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FTP
Calculated from Gross Revenue Works as a modified Royalty Can cause premature abandonment

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NPV formula (end year)


NPV = =F +
0

F1

n=0

Fn F2

(1 + i)n

(1 +

i)1

+ (1 + i)2 + ... +

Fn

(1 + i)n

...where: Fn - the net income in year n i - discount rate n - total numbers of years (project duration)
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Time value of money


3500

Cash flow
3000

Cummulative cashflow
2500

Current Values Real Values

Inflation corrected + Value of time corrected

2000 Million USD

1500

1000

Discounted Values

500

0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

-500

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Present Value
Year 2003 2004 2005 2006 2007 2008 SUM Cash Flow NPV 5% NPV 10% NPV 15% NPV 20% -200 -200.0 -200.0 -200.0 -200.0 -50 -47.6 -45.5 -43.5 -41.7 10 9.1 8.3 7.6 6.9 100 86.4 75.1 65.8 57.9 100 82.3 68.3 57.2 48.2 200 156.7 124.2 99.4 80.4 160 86.8 30.4 -13.6 -48.3

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Present Value - IRR


200 150 100

IRR

50 0 NPV

5%

10 %

15 %

20 % -50 -100

Discount Factor

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Expected Monetary Value


EMV=(R*SP)-(RC*(1-SP))
EMV=Expected Monetary Value R = Reward = Net Present Value (NPV) SP= Success Probability RC= Risk Capital = Bonuses, Dry Hole Cost, G&G etc.

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EMV - Example
Assumptions
NPV = 120 million USD RC = 15 million USD SP = 22% EMV = (R*SP) - (RC*(1-SP)) EMV = (120*0.22) - (15*(1-0.22)) EMV = 14.7million USD
Break even SP = 12.5% (EMV=0)

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EMV curve
140

Reward (NPV)
EMV curve

120

100

80

Million USD

60

40

Break even POS Calculated POS

Calculated EMV

20

0 0 -20 10 20 30 40 50 60 70 80 90 100

Probability of Success (%)


-40

Risk capital

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Synonyms
Net present value (NPV) Present value Discounted cash flow Present value profit (PVP) Present worth (PW) Rate of return (ROR) Profit investment ratio (P/I ratio) Return on investments (ROI) Expected value Risked value

Internal rate if return (IRR)

Expected monetary value

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Basic assumptions
Start Year Oil Price
Starting value Escalation Model

Inflation Discount rate and year Depreciation rules

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GeoX Demonstration
The structure and functionality of GeoX
Prospect Analysis Discovery Analysis Full Cycle Analysis

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